Event Recap: Preparing for M&A as a Microsoft Dynamics Partner

When a potential acquirer comes knocking on a Microsoft partner’s door, how should they be able to respond?

Much has changed in the acquisition landscape for Microsoft Dynamics partners over the last five years, but companies with the right business models, strong financial oversight, and up-to-date strategic planning can still realize strong valuations in the marketplace. That message came from a panel of channel veterans who have seen and been part of a broad range of mergers and acquisitions in their careers and shared their outlook with the community in a recent Stratos Cloud Alliance webcast hosted by MSDW.

Scott May of Stratos Cloud Alliance hosted the event and was joined by Joe Longo, co-founder of Velosio, and Linda Rose, a Microsoft channel veteran who advises IT services companies on the acquisition process. 

Rose and Longo each bring a range of IT services company acquisition experiences to the conversation. Rose sold her most recent business in 2017, briefly considered retiring, then wrote a book and found a slate of new projects advising companies looking to sell. Longo on the other hand has worked on both sales and purchases of companies with valuations ranging from as little as $650,000 to millions of dollars. 

Longo explained the acquisition experience in today’s market in terms of headwinds and tailwinds:

Right now, the market is neutral with things that are positive and negative. On the positive side, Microsoft is hot right now. Just look at their stock price, which has been on a multi-year run. That’s a tailwind. Cloud is hot, and no longer what it was five years ago, when it was still somewhat unproven. Another positive thing is AI or the promise of AI. Those things are tailwinds. 

On the other side are headwinds. The economy is kind of mixed right now, with some segments up, others down. Interest rates are up. If you’re buying or selling and using any kind of capital, investors don’t typically want to make less. [Parties] either have to lower sales prices or make [deals] more structured. Deals are still happening, though maybe not at the pace of 2022 or 2023. Things started to slow a little bit in 2023. [Nevertheless] we were just part of one of the biggest deals in the Dynamics space ever…If you have a good business, there’s always somebody who would be interested. 

Rose has a bird’s eye view of the market, with 12 ongoing deals at the moment, including three that have reached the letter of intent stage and one that closed. She noted that the Covid-19 pandemic actually accelerated digital transformation, boosting market demand for Dynamics partners. Despite concerns about fluctuating interest rates, she sees market activity still going strong, with private equity firms gravitating toward Microsoft partners. For Rose, the smallest company she is working with right now is valued at $3 million, while the largest deal she has done was valued at $80 million. 

Rose explained that, for sellers, the right preparation is key to getting the best price for your business, whenever the opportunity arises. 

The more prepared you are, the better price you will get. Start with financials, particularly GAAP accounting. You can do cashflow internally, but the bulk of your business needs to be GAAP.

Longo agreed, noting that the market is still strong, even if it is not as active as 2021.

Typically, sellers spend about eight or nine months in a sales posture, Rose has observed. Initially, they put together a confidential information memorandum, sift through a database of potential buyers, put together a “data room” in advance, secure non-disclosure agreements (NDAs), then work to get multiple letters of intent to kick off a bidding war for the company. 

Today, it usually takes about 90 days to do due diligence, particularly in the aftermath of Covid-19 with a heightened emphasis on IT assessments, Rose told the audience. For business owners who can take a longer view, Longo suggested that executive teams use a three-year outlook to help keep a focus on maximizing the firm’s value, with a commitment to tracking and updating that plan yearly. He explained:

Your business should always be for sale or ready for sale. Certainly, north of $10 million is where you start to see this, or some degree of [preparation] based on institutional money. A QOB, or quality of business assessment, [is common] and having earnings audited will be mandatory at certain size. If you have a PE that hasn’t made investments in this space, they may want to do a market analysis. Legal compliance is also important. Sometimes this even means an environmental assessment. Lawyers want to know you’ve got no chemicals in your offices! HR compliance [is also important, looking at employees getting paid and] any ongoing liability. Technological assessments or sales tax compliance come up almost every time. Last but not least, as deals get bigger, with more and more institutional money, you need to fill out reps and warranties.

Rose added that her clients valued at over $20 million all do quality of earnings reports in advance, particularly if they are backed by private equity firms. Savvy companies get ahead of the process, getting reports done in advance so they can optimize how the business runs. Investors often look for large, reputable accounting firms but even smaller audit firms will usually suffice and may offer better rates. 

Longo told the audience he distinguishes between valuations and ways to increase a valuation. Managed service providers (MSPs) and cloud service providers are often valued most highly, along with ISVs. An IT services company with less than $5 million in revenue might expect a multiple of 3-4 times EBITDA, a multiple of 4-6 for a platform company under $10 million, and upwards of 6-8 for a company in the $30 million range, with multiple locations, multiple products, and a professional management team. VARs tend to be valued the lowest, Rose has observed, because PE firms are aware that VARs are reliant on margins set by a single vendor—although Microsoft’s relatively stable margins (compared to competitors) may make them more desirable than VARs for other enterprise software vendors. 

The PE community has grown increasingly interested in re-occurring revenue, especially if it can be converted to guaranteed recurring revenue with contracts, Longo noted. Additionally, PE firms carefully consider factors like employee churn, revenue per employee, and whether an owner has established a professional management team that increases the long-term survivability of the organization. 

Rose encouraged all companies working to sell to review for EBITDA adjustments, because many companies miss this opportunity to raise their performance and valuation. Longo agreed and added that business owners can benefit from always being prepared to discuss a sale. 

Always be ready to be sold. If not, you’re kind of cheating yourself. How can I maximize my offer … because there is only so much time to be prepared in advance. If I know you’re going to sell in the next three years, assemble a data room so you know what you’re missing. Talk about reviews and audits. QOB before due diligence is helpful. And have ready a three-year projection. It doesn’t have to be three years but that’s good to guide the business. It’s pretty powerful to map against that, and have a track record of hitting it.